Question

Benoit Company produces three products—A, B, and C. Data concerning the three products follow (per unit):

	Product
	A				B				C
Selling price	$	80.00			$	60.00			$	72.00
Variable expenses:
Direct materials		24.00				15.00				9.00
Other variable expenses		24.00				33.00				45.00
Total variable expenses		48.00				48.00				54.00
Contribution margin	$	32.00			$	12.00			$	18.00
Contribution margin ratio		40	%			20	%			25	%

The company estimates that it can sell 1,000 units of each product per month. The same raw material is used in each product. The material costs $3 per pound with a maximum of 6,000 pounds available each month.

Required:

1. Calculate the contribution margin per pound of the constraining resource for each product.

2. Which orders would you advise the company to accept first, those for A, B, or C? Which orders second? Third?

3. What is the maximum contribution margin that the company can earn per month if it makes optimal use of its 6,000 pounds of materials?

Answer 1

		Product
		A	B	C
	Selling price	80	60	72
	Variable expenses:
	Direct materials	24	15	9
	Other variable expenses	24	33	45
	Total variable expenses	48	48	54
	Contribution margin	32	12	18
	Contribution margin ratio	40	20	25
	Material Req per unit	8	5	3
1)	Contribution per pound	4	2.4	6
	(Contribution margin per unit/ material Req per unit)
2)	Ranking of production	Second	Third	First
3)	No. of units to be manufactured	375		1000
	material requirement in production	3000		3000
	(Total 6000 pounds)